Is it better to be paid via a 1099 or W-2? Are W-2 and 1099 employees the same? Whether you're starting out as an independent contractor or a new business owner, understanding the difference between a 1099 and a W-2 is essential. Use this blog as your guide in understanding each form, how they differ, and the responsibilities attached to each.
What Is a 1099 Tax Form?
A 1099 tax form is a way to document money that is sent or received by businesses and individuals. Small businesses can send this form to non-salaried contractors for work or services performed.
There are 16 different 1099 forms, which serve various business purposes. The most common are 1099-MISC (miscellaneous) and 1099-NEC (non-employee compensation). These forms document funds paid or received that haven’t been subject to income tax.
Who Completes IRS Form 1099?
If you're a business owner who has worked with contractors who aren't salaried, it is your responsibility to obtain, complete, and distribute the proper Form 1099 to those workers. This form can be obtained from the IRS.
Things to know about completing IRS Form 1099:
When Will You Receive a 1099?
There is also a deadline for businesses to send contractors their 1099s — for the 2022 tax year, 1099s must be sent by January 31, 2023.
If you’re a contractor and haven’t received your 1099 by this deadline, take the following steps to obtain your form by:
- Contacting the payer – Your first call should be to the business issuing your 1099.
- Contacting the IRS – If you don’t hear from the business before your income tax return is due, contact the IRS. The IRS will provide instructions for filing your income tax return and instructions for submitting your 1099 when you do receive it.
To issue a 1099 tax form as a small business, you will need to gather details from your contractor before the deadline. If you are a contract worker, be aware of the tax issues that can cause trouble for 1099 workers.
What Is a W-2 Tax Form?
Businesses issue W-2 tax forms to traditional employees who were paid $600 or more during a tax year.
If you’ve worked as a traditional salaried employee, your paycheck has probably featured at least three regular deductions for:
- Withheld income tax,
- Social Security tax, and
- Medicare tax.
When these taxes are deducted from your paycheck, your employer pays them to the IRS on your behalf. And at the beginning of the following year, your employer will issue you a W-2 that lists the following:
- Your gross and net pay throughout the previous tax year
- The amounts of federal income, Social Security, and Medicare taxes they paid on your behalf throughout the year
Like a 1099 form, you’ll use your W-2 to file your income tax return for the previous tax year.
Who Completes a W-2 Tax Form?
While your employer will complete a W-2 tax form and send it to you, the information on your W-2 (and the taxes a business pays on your behalf throughout the year) will depend on critical information from your W-4 tax form.
A W-4, or Employee’s Withholding Certificate, lists the amount of federal income tax you’d like withheld from your paycheck. Ultimately, it’s up to you to determine how much of your income you’d like to withhold for tax purposes:
While you’ll likely fill out a W-4 when you're hired, you should also fill out a new W-4 if your tax situation changes (e.g., when you get married or have a child).
When Will You Receive a W-2?
Like 1099s, employers must send W-2s to their employees by a certain deadline, which changes yearly. For the 2022 tax year, this deadline is January 31, 2023.
Like 1099s, if you don’t receive your W-2 by the deadline, you should:
- Contact your employer
- Contact the IRS if your employer doesn’t respond to your request or issue you a W-2 before the federal income tax filing deadline
1099 vs. W-2: Similarities and Differences
Forms 1099 and W-2 have a few elements in common:
But, there are a few critical differences to keep in mind:
Filing Your Taxes with IRS Forms 1099 and W-2
Should I do a 1099 or W-2? While you might receive a combination of W-2s and 1099s, you can use both to calculate your total income tax liability for the year:
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Whether you're a contractor or business owner, understanding the benefits of 1099s vs. W-2s is an important step in your journey. But there's so much more to know about forms and filing taxes, which is where 1-800Accountant comes in. Our tax professionals will handle even the most complex tax forms and situations. From easy-to-understand bookkeeping to affordable payroll to personal income tax preparation, we have you covered.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.